Why it’s important
Finding expenses or costs that lie outside of an appropriate range is a quick way to monitor and improve productivity. By initially focusing on the big ticket expense items like machinery, land, fertility and crop protection, it’s possible to see significant improvement in profitability with incremental improvements in cost control.
Lets get started
Calculate your cost of production
The following simplified cost of production calculator takes into account variable costs. Differences in management, location and scale affect your numbers, but calculating this basic COP can help you spot outlier costs that need to be examined further. The default values are taken from the 2018 OMAFRA cost of production comparison summary for selected field crops.
(page 4 at http://www.omafra.gov.on.ca/english/busdev/facts/pub60.pdf)
Calculate your basic cost of production by clicking on the worksheet below.
Whether you use the COP for low, average or high yield levels when developing a marketing strategy is a way to manage your exposure to risk.
Pushing your numbers through this process shows how there are a few different ways to manage and push cost of production down. The most obvious is to increase yields – the differences in the low, average and high yield environments show the power of yield to lower the per unit COP.
For grain production you only get one opportunity per year to impact specific expenses, which makes setting a target or goal an extremely valuable exercise. If you have identified one or multiple expenses that need to be reined in, set a realistic goal of 5 or 10%.
|Current Cost/ac||5% Reduction Goal||10% Reduction Goal|
Set a Goal for decreasing your cost of production:
The “golden rule” of farm management: a 5% improvement in productivity, plus a 5% increase from marketing savviness, plus a 5% gain in efficiency (lowered production costs) equals a 117% improvement to the bottom line.1
“We want to know our cost of production per bushel or tonne so we can understand and know what price we need to cover variable costs. If you wait until harvest you will know the exact cost of production per bushel, but this limits informed marketing in advance of harvest.”
– Peter Gredig, Grower
“Grain marketing with or without on-farm storage requires a plan and discipline. For those with storage, the issue that can arise is defaulting to a “hold and hope” strategy where the grower puts the crop in the bin and sits on it waiting for better prices. Every grower has to find their comfort level with how much forward contracting or price taking to do before harvesting or even planting the crop.”
– Peter Gredig, Grower
OMAFRA Field Crop Budgets:
These budget sheets allow for a more detailed look at your cost of production for various crops.
AgriStability Towards Improved Profits (TIP)
Farmers who participate in the AgriStability program can request a management analysis report that looks at the information submitted for AgriStability. The TIP report compares current year performance with the farm’s 5 year average. It also provides industry benchmarks for each line item based on the type of farm and income range. It is an excellent resource to help spot outlier costs that need to be addressed.
http://www.omafra.gov.on.ca/english/busdev/facts/tipreport.htm or call 1-877-424-1300